The Australian dollar fell more than 1% against the US dollar on Wednesday as US Treasury yields pushed higher, and both the 5- and 10-year notes moved through the 5% level. AUD/USD was trading around 0.7039–0.7041 after an earlier peak at 0.7118, while the US 5-year yield rose 17 basis points to 4.99% and the 10-year yield added 15.5 basis points to 5.11%, the highest since 2007. Alongside the move in rates, the US Dollar Index (DXY) gained 0.57% to 101.25.
US data showed firm activity: the S&P Global Manufacturing PMI rose to 57 from 53.9, beating a 53.5 forecast, and the Services PMI increased to 58.7 from 56.5 versus a 56 estimate. Market pricing for a 25 bps Fed move in October increased from about 52% to 66%, while December odds were at 93%, according to Prime Terminal. In Australia, the S&P Global Composite PMI eased to 50.8 from 52.7 as manufacturing contracted and services slowed. Next, employment is expected to swing from -15.8K to 20K, with unemployment seen steady at 4.5%.
Derivative Trading Strategies Amid Rising US Yields
We advise derivative traders to position for further downward pressure on the AUD/USD as US Treasury yields hold firmly above the crucial 5% threshold. Given that the US 10-year yield has surged to 5.11%, matching peak levels not seen since the 2007 financial crisis, purchasing short-term put options on the Aussie dollar is a highly attractive play. This strategy allows us to capitalize on the widening yield spread between the US and Australia while keeping our risk capital protected.
With Australia’s upcoming jobs data expected to show the unemployment rate holding at 4.5%, any weakness in the employment change figure could easily push the currency pair below its immediate support at 0.7040. Historically, during similar periods of aggressive Federal Reserve tightening—such as in late 2023 when US yields last approached these heights—the Aussie dollar fell sharply against the greenback within days of missing local economic targets. We should look to place tight stop-losses just above the triple simple moving average resistance cluster at 0.7092 to manage risk on short positions.
Capitalizing on US Dollar Strength and Australia’s Weakening Outlook
As market expectations for an October Fed rate hike climb to 66% and December odds reach a massive 93%, the US Dollar Index is well-positioned to climb past its current 101.25 mark. We can exploit this momentum by trading bullish call spreads on the US dollar, especially since US manufacturing PMI has shown surprising resilience by rising to 57. Australia’s slowing composite PMI of 50.8 confirms that the domestic economy is losing steam, which will continue to limit any meaningful recovery for the AUD.
